When you're a small business owner, it can be very difficult to draw the line between business and personal. So much of what is your own goes into making the business successful, therefore the distinction can be extremely ambiguous. However, one line that needs to be drawn is between your personal credit and your business credit. It can be easy to rely on your personal credit to fuel the needs of your business, but if you're not careful, this could do serious damage to your personal credit. Not to mention, your personal credit can only get you so far in the business world. If you seriously want to consider such things as trade credit or growth financing, it will be crucial that your business has a separate business credit score. Below are a few fast facts as to why good credit is essential for your small business.
What is the Difference Between Business Credit and Personal Credit?
As an individual, your credit is a summary of your payment habits on such things as personal credit cards, bank accounts, utility bills, and pretty much any other debt you have that is reported to the credit bureaus. Business credit is similar in rating your business' "creditworthiness", such as if your business pays its bills (and how quickly), along with revenue and amount of total credit.
Most different are the laws associated with consumer and business credit. For example, consumer credit laws allow you to to challenge anything on your personal credit report (which you can't do with your business). You are entitled to the Fair Credit Reporting Act as an individual, but business credit reporting laws aren't quite as strict. Also, you should be aware that your business credit and personal credit are scored on completely different systems. Personal credit is on the well-known FICO system, but business credit scores vary considering the credit bureau scoring them.
What are the Business Credit Scoring Systems?
Dun & Bradstreet is the bureau most associated with business credit, and they use their own D&B rating along with what is called a PAYDEX score. The PAYDEX score is the most popular scoring system for businesses. It's easy to interpret, existing on a scale of 0-100. 80 verifies a business as one that pays promptly; anything higher means they pay earlier, and anything lower means they pay later. Experian, another major bureau, also uses a system similar to the Paydex. The higher the score, the less risk. Equifax, the 3rd of the major bureaus, provides a few different scores, such as ones that evaluate the likelihood of severe delinquency as well as the likeliness of your business failing.
What Does Excellent Credit Mean for My Business?
Not only is important to start building business credit to protect your personal credit, but business credit can open doors. With stronger business credit, you'll naturally reduce the cost of credit, receive more flexible terms from your vendors and better financing options. Be careful, however, to keep this credit healthy. As with your personal credit, bad business credit can make access to capital very difficult. If your business credit isn't strong, then you'll be forced to have financing apply to your personal credit, which could tarnish that score.
If you have great personal credit, it may be tempting to coast on that while running a business. However, if you truly want to grow your business, it's necessary to build your own business line of credit. Not sure where to start? Check out this free building business credit boot camp.
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